Category: Consumer Debt

While the rate of bad credit card debt and other loans being written off by lenders has slowed in recent months, it should pick up again in the next 12 months.

The financial analysis company Moody’s Investors Services says the rate at which bad debt is written off will likely skyrocket before the end of next year, the Associated Press recently reported. The firm estimated American lenders will write off a total of $744 billion worth of bad debt between 2008 and 2011, and so far they have only cleared $476 billion, about two-thirds of the predicted total in the first three years of that period. That leaves another $268 billion to be cleared by lenders between now and December 2011.

Moody’s figures showed 68 percent of residential mortgage losses have been claimed, but less than half of those for commercial real estate yet to be taken, the AP noted.

In addition, Moody’s predicts the return to the normal credit conditions seen before the recession will be “slow and uneven” during the next 18 months, the report said. If the global economy slides backwards in the remaining months of 2010, credit problems could reappear here in the U.S. as well. However, Moody’s says there is only a 30 percent chance at most that this will happen. Still, banks are being more cautious, keeping their outlooks negative as a result.

While the number of seriously delinquent loans being written off as uncollectable has decreased each of the last three quarters, rates for almost all loan categories are still at, or near, historic highs, the AP said. However, this type of loan accounted for just 3 percent of all loans in the second quarter, the lowest level observed since early 2009. Similarly, loans that are delinquent but have yet to be written off accounted for roughly 4.7 percent of the all lending as of the end of June.

Many credit card lenders have reduced their total number of charge-offs in recent months because consumers have cut into their credit card debt. Consumer credit has dropped in each of the last several months as Americans spend less on their cards and make a more concerted effort to pay into their total balances.

In July, the Federal Reserve Bank of Boston released a paper [highlighting the social inequity of credit cards rewards programs. It found low income consumers were paying off credit card debt and, in doing so, lining the pockets of the rich who had enrolled in such programs.

However, the figures the Boston Fed originally estimated were recently reduced after some criticism of its methods. It now estimates poor households – those who bring in less than $20,000 a year – pay $21 a year into programs that reward consumers for taking on credit card debt, while rich consumers – those whose household income is over $150,000 – earn $750 per year. Originally, the paper said those figures were $23 and $756, respectively.

The changes came about after consumer advice website Nerdwallet.com questioned why the study included housing costs, auto payments and tuition for higher education in its data. The Boston Fed removed the housing information, but kept the other categories because consumers, who regularly take on credit card debt, pay for those things.

Often, consumers with low incomes are unable to qualify for credit card rewards programs because their credit scores are too low.

Many employees across the country have credit cards in their name that were issued by their employers to cover business-related expenses such rental cars and hotel rooms. But they may not be aware that they could end up stuck with the debt on those accounts if their employer can no longer pay the bills.

About 35 percent of all business-issued credit cards have agreements in which the card’s carrier can be held responsible for any debt on the account, ABC News recently reported. The companies that are most likely to issue a credit card with these agreements are the largest ones, including many Fortune 500 firms.

The report said many employees are unaware that they have entered into such an agreement when taking a business-issued credit card. When a consumer’s company goes under, they are often shocked to learn that they owe thousands in delinquent credit card debt their former employer couldn’t pay.

Because consumers are often unaware of these arrangements, that debt can go months without being paid, and in addition to owing all the money, they may also find their credit score has taken a severe hit. The report said some legal websites have seen many questions about corporate card liability since the recession hit.

ABC News said warning signs can show up in the application process, where employees may be asked to give their personal financial information, most typically their name and Social Security number. If that information is requested, then it’s likely they are entering into such an arrangement. Other indicators include a corporate account which shows up on their personal credit report, and if they are required to pay the bill and then get reimbursed.

Consumers should be wary of these agreements, since many have enough trouble with their finances even before being saddled with thousands in additional credit card debt. If an employer is going out of business, the report recommends that consumers should urge them to negotiate some sort of debt settlement. This way, an employee won’t be stuck with the account on their credit report.

Consumers who already have a business-issued credit card and are worried that this may happen to them should ask their employer for a copy of the agreement and check whether there is individual or joint liability on the account.

Many consumers may have had an easier time making their payments toward their credit card debt in July after an extended period of not being able to do so.

According to the latest Credit Card Index results from Fitch Ratings,the rate of accounts with delinquent credit card debt, both long- and short-term, declined significantly in the first month of the year’s second half. The company said that this was the result of all major lenders reporting drops in delinquency.

The percentage of consumers who were between30 and 60 days behind in paying down their credit card debt dropped for the fifth month in a row to a total of 5 percent, from the 5.13 percent observed the month prior. The rate of those whose credit card debt was more than 60 days delinquent also fell, in this case for the seventh consecutive month, to 3.76 percent from 3.86 percent in June. That total was a 19-month low. All major lenders that Fitch tracks, with the exception of Washington Mutual Master Note Trust, reported lower delinquency rates in July.

Similarly, Fitch said, defaults on credit card debt also fell in July, to 9.65 percent from 10.58 percent in June. This was the first time that rate dropped below 10 percent in 15 months, but was the second straight month it improved. However, the index – which measures the total rate of balances that lenders have to abandon as being irretrievable and strike from their records – is still more than 60 percent higher than the historical average of 5.88 percent. Fitch said Bank of America, Chase, Capital One, Citibank and Discover Financial all saw declines in their default rates.

“The trends are encouraging, but card defaults are still elevated historically and are expected to remain so,” said Michael Dean, the managing director for Fitch. “Unemployment will continue to weigh on consumer credit quality throughout the rest of this year and well into 2011.”

While these drops may indicate that consumers now have more money to put toward paying off their credit card debt, they could also signal that consumers – particularly those without regular employment – have been unable to get credit for so long that they have simply fallen out of the system.

As millions of consumers across the country struggle with credit card debt and other monthly payments, many have been forced to consider filing for bankruptcy. And the price of doing so is on the rise.

According to a new study from the American Bankruptcy Institute Law Review, the cost of filing for either Chapter 7 or 13 bankruptcy has risen 55 percent since Congress passed reforms to make it harder to do so in 2005. Citing data from cases in Florida, Illinois, Georgia, Maine, Utah and West Virginia, the study found that fees and expenses for attorneys and trustees, filing costs and credit counseling services have led to the increases. In addition, they have reduced the total amount creditors make against the money they’re owed.

The study found that Chapter 13 filings now cost consumers $4,077 on average, up from $2,930 in 2005. Similarly, the price of a Chapter 7 case jumped from $900 to $1,399.

While bankruptcy may seem like an attractive option for consumers who are deeply in debt, many experts say that seeking such protection should only be considered as a last resort.

While credit card issuers were expected to pare back rewards in a cost-cutting measure after the implementation of the Credit Card Accountability, Reliability and Disclosure Act, many have not. That strategy is paying off for them.

According to a new report from Fox Business, cards that reward consumers with frequent flier miles for every dollar of their credit card debt have been growing in popularity.

As a result, issuers are looking for ways to improve such offers while keeping an eye on their bottom line as more consumers try to eliminate credit card debt. David Gold, senior vice president at Chase, told Fox that despite the Credit CARD Act, interest in the accounts has been robust.

“Over the years, the frequent flier mile has been pretty valuable,” he told the news service. “The value is there.”

Often consumers will exchange the convenience of being able to compile frequent flier miles for slightly higher rates on their credit card debt or some sort of annual fee. But a recent study found that consumers who use these plans, particularly those that offer double or triple miles, may not be the best value. Consumers may want to shop around to determine which type of rewards card is best for them.

The amount of credit card debt the average consumer now carries has slipped below $5,000 for the first time in close to a decade.

According to the latest quarterly findings from TransUnion, consumers cut theirpersonal credit card debt by 4.1 percent in the second quarter of the year. That figure fell from the $5,156 seen last quarter to $4,951, marking the first time the average consumer’s debt was below $5,000 since the first quarter of 2002. Further, that number was a 13.4 percent drop from the same period in 2009, when it was $5,719.

And as consumers pared back debt on their credit card, the rate of total delinquency dropped slightly in the second quarter, by 0.92 percent. However, that was a decline of 17.1 percent over the first quarter, and 21.3 percent from the same period a year ago.

Credit card spending in general also declined in the second quarter, and given these numbers, it seems more consumers put the money they would have spent towards paying down their total debt.

Part of the Credit Card Accountability, Responsibility and Disclosure Act mandated that credit card companies had to rein in the fees they charged merchants to process debit transactions. That change could cost lenders billions.

According to a report from the San Francisco Chronicle, Visa and MasterCard – the two largest credit networks in the world – made about $20 billion on swipe fees last year, and all that money came from businesses, both large and small. By changing the rules governing these charges, merchants will save a considerable amount.

"We’ll be delighted to see the fees go down," Rick Karp, the owner of a hardware store, told the paper. "Banks have been getting away with murder for some time now. About 3 cents of every dollar spent in our stores goes to banks for the use of the cards."

However, Visa told the paper that it doesn’t believe these fees are outrageous. By paying that 3 cents on a dollar, they get guaranteed payment, potential for increased sales, faster checkout times, and increased security and convenience that they wouldn’t get if they stopped accepting credit and debit card transactions.

The paper also said that these credit networks are warning consumers that they’ll end up paying the amount lost to the regulation of swipe fees in other ways, either by creating other charges or cutting back on rewards. In addition, the lowered cost for merchants doesn’t guarantee that the savings will be passed on to customers, they say.

As of July 21, the Federal Reserve Bank had eight months to determine a rate for swipe fees that is "reasonable and proportional" to processing costs, the report said. Doing so takes the power to set these rates out of the hands of major banks. And while these changes only affect debit card transactions, others will allow merchants to decide how they deal with several other types of transactions as well.

The provisions of the Credit CARD Act are designed to give consumers greater ability to handle their credit card debt and offer them more protection from lenders’ predatory practices. In addition to reining in fees, these rules also regulate what kinds of consumers have access to certain types of credit and how lenders can alter agreements.

How people keep an eye on their bank accounts and credit card debt is changing as rapidly as technology will allow.

Many consumers have, in the past year or two, discovered the convenience offered to them by mobile banking, according to a new report from Seeking Alpha, a consumer news website. Much like the online banking and credit card debt management boom about five years ago, experts believe banking on smartphones is going to be the next big thing in the financial industry.

The report said that the Mobile Marketing Association has projected roughly 30 million Americans will use their phones for mobile banking by 2015, compared to about 65 million who will use online banking. For mobile banking, that would mark an increase from about 1 million in 2008. Currently, only 1,000 of the 30,000 banking institutions nationwide offer such a service.

Many consumers may prefer mobile banking because it offers the convenience of instantly transferring funds between accounts or paying off credit card debt while on the go. Some banks are even testing systems that would allow consumers to use their mobile phones to make a payment in lieu of using their a card to compile credit card debt.

Many consumers may have had trouble paying off their credit card debt in recent months, and a new study has found that lenders are likely contributing to the problem with interest rates not seen since 2001.

According to new statistics published by market research firm Synovate, interest rates on credit card debt have climbed considerably over the last year or so, from 13.1 percent in the second quarter of last year to 14.7 percent for the same period this year. That rate is the highest level observed by the company since 2001.

A Wall Street Journal report on the figures said that they are especially troubling for consumers when compared to the prime rate – against which rates on credit card debt are set. The current difference of 11.45 percentage points is the largest in the last 22 years. On the other hand, differences in the rates for 10-year Treasury bonds and those on 20-year fixed mortgages are near historical averages.

The Journal report said that the increases are driven by a number of factors, but the primary reason is almost certainly the passage of the Credit Card Accountability, Responsibility and Disclosure Act last year. One provision of that law dictated that lenders could not increase rates or fees on the cards they issue without at least 45 days’ notice to consumers.

Further, the report said most lenders are dealing with delinquency and charge off rates that are higher than most historical averages, even despite recent drops. In the past, banks would boost rates immediately on any borrowers who fell behind on their payments. But even this is no longer possible unless a consumer makes late payments habitually.

Those two factors have led to banks setting higher initial interest rates on credit card debt to help preemptively stem the potential revenue losses from more lenient delinquency policies mandated by the Credit CARD Act, the report said.

"We can’t come up with penalty pricing or if we can, quite frankly, it’s too late to do much good," Stephanie Keire, head of consumer credit-card risk management at Wells Fargo & Co., told the paper.

The final rules of the Credit CARD Act went into effect on August 22. Now the maximum a lender can levy against a consumer is $25 for a first offense and $35 for any further instances within the next six billing cycles.